Analysis: Implications for shipping in BP settlement, indictments

Friday, November 16, 2012

The U.S. government's criminal prosecution of BP and several of employees has significant implications for the shipping industry, underscoring the importance of adhering to safety practices and
potential criminal liability of individuals if an accident occurs.
BP Exploration and Production Inc. (BP) agreed Thursday to plead guilty to felony manslaughter, environmental crimes and obstruction of Congress and pay a record $4 billion in criminal fines and penalties for its conduct leading to the 2010 Deepwater Horizon rig disaster.
The Deepwater Horizon explosion and fire killed 11 people and caused what the Justice Department called the “largest environmental disaster in U.S. history.”
The oil company was charged in federal district court in Louisiana with 11 counts of felony manslaughter, one count of felony obstruction of Congress, and violations of the Clean Water and Migratory Bird Treaty Acts.
Attorney General Eric Holder said the fines have been structured so that “more than half of the proceeds directly benefit the Gulf Coast region so that residents can continue to recover and rebuild.”
BP said the fine would be paid over six years and the aggregate amount would be about $4.5 billion, including $525 million to settle a $525 million securities fraud charge with the Securities and Exchange Commission. The SEC said BP misled investors by significantly understating the flow rate of oil from the damaged well in multiple reports.
“The explosion of the rig was a disaster that resulted from BP’s culture of privileging profit over prudence,” said Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division. “We hope that BP's acknowledgment of its misconduct – through its agreement to plead guilty to 11 counts of felony manslaughter – brings some measure of justice to the family members of the people who died onboard the rig.”
In addition to the resolution of charges against BP, indictments from a grand jury in the Louisiana against three BP executives were unsealed.
Robert M. Kaluza, 62, of Henderson, Nev., and Donald J. Vidrine, 65, of Lafayette, La. – the highest-ranking BP supervisors onboard the Deepwater Horizon rig at the Macondo well site on April 20, 2010 – are alleged to have engaged in negligent and grossly negligent conduct in a 23-count indictment charging violations of the federal involuntary manslaughter and seaman’s manslaughter statutes and the Clean Water Act.
The government claims on the evening of April 20, Kaluza and Vidrine, “observed clear indications that the Macondo well was not secure and that oil and gas were flowing into the well. Despite this, BP’s well site leaders chose not to take obvious and appropriate steps to prevent the blowout. As a result of their conduct, control of the Macondo well was lost, resulting in catastrophe.”
Each of the two men are charged with 11 felony counts of seaman’s manslaughter, 11 felony counts of involuntary manslaughter and one violation of the Clean Water Act. If convicted, Kaluza and Vidrine each face a maximum potential penalty of 10 years in prison on each seaman’s manslaughter count, up to eight years in prison on each involuntary manslaughter count, and up to a year in prison on the Clean Water Act count.
David I. Rainey, 58, of Houston – a former BP executive who served as a deputy incident commander and BP’s second-highest ranking representative at Unified Command during the spill response – is charged with obstruction of Congress and making false statements to law enforcement officials
The government said BP, through Rainey, obstructed an inquiry by Congress into the amount of oil being discharged into the Gulf while the spill was ongoing. As part of its plea agreement, BP has admitted that, through Rainey, it withheld documents and provided false and misleading information in response to the U.S. House of Representatives’ request for flow-rate information. Among other things, BP admitted that Rainey manipulated internal estimates to understate the amount of oil flowing from the well and withheld data that contradicted BP’s public estimate of 5,000 barrels of oil per day.
The government said as Rainey was preparing his manipulated estimates, BP’s internal engineering response teams were using sophisticated methods that generated significantly higher estimates.
The government also said a “Flow Rate Technical Group,” consisting of government and independent scientists, later concluded that more than 60,000 barrels per day leaked into the Gulf during the relevant time, contrary to BP’s representations to Congress.
Rainey is charged with one count of obstruction of Congress, and one count of making false statements to law enforcement officials. If convicted, Rainey faces a maximum potential penalty of five years in prison on each count.
John Kimball, an attorney at Blank Rome who is teaching a course on oil spills at New York University Law School this semester, said he had not yet had a chance to read all the documents to see exactly how the penalties were calculated, but said they were “unprecedented, but appear appropriate given the circumstances. It is a strong message to the industry.”
Kimball said he was “surprised by the criminal penalties and that agreeing to pay did not take care of the whole case.”
He also noted the company still may be subject to substantial civil penalties.
Calculation of the penalties are complex, he said, because the Clean Water Act was designed with tanker spills in mind, not oil rig accidents where oil continues to flow into the ocean for many days or months. He said there is still an ongoing process to determine the rate of flow from the oil well.
Alfred Kuffler, an attorney at Montgomery McCracken & Rhoads who was lead counsel to the owners and insurers of the Athos I after its November 2004 oil spill on the Delaware River, said fines can amount from $1,100 per barrel to as much as $3,300 in cases of gross negligence. The Flow Rate Technical Group estimated that as much as 4.9 million barrels of oil spilled from the well, meaning the company could potentially be hit with civil penalties ranging of more than $16 billion if they were found grossly negligent and the spill estimates were found to be accurate.
BP said Thursday that it will “continue to vigorously defend itself against all remaining civil claims and to contest allegations of gross negligence in those cases.”
In addition to those arising under the Clean Water Act, BP said other civil charges may include federal and state natural resource damages claims; private civil claims not already settled, private securities claims, and state economic loss claims; and miscellaneous private civil claims.
For shipping companies, Kuffler said the indictments and settlement emphasize the importance of adhering to the International Maritime Organization’s International Safety Management Code for the Safe Operation of Ships and for Pollution Protection (ISM Code).
The ISM Code requires companies to set up safety management systems, implement a policy for achieving safety objectives and provide resources and shore-based support.
“If shipping operators are serious about their safety management program, that ought to serve as a real shield,” in the event of an accident and litigation.
“Senior management who are on the line and might be targets for indictments if something really goes wrong ought to pay attention and maybe revisit their safety management programs, because that is the protection,” Kuffler said.
The decision to use the seaman’s manslaughter statute to charge Kaluza and Vidrine is part of trend to use that law more frequently than in the past.
Melissa Bert, chief of the maritime and international law division at the Coast Guard, highlighted the use of the law in a speech earlier this week in cases where men and women have been killed while parasailing.
Kimball said the statute is used in cases where deaths allegedly have resulted from negligence and has been used “quite a bit” in the past decade.
“They are serious penalties—you are looking at significant fines and way more significantly, prison, which is as serious as it gets.” - Chris Dupin